You know you're going to need a business loan sometime soon. You may even have heard that the SBA, having raised its lending cap for the year, is back in the financing business again. But is an SBA loan right for you? Would you be better off trying for a bank loan? Or one of the countless sources of alternative financing? And while you're trying to run a business that already has you working late every day, how will you ever find the time to figure it out?
We can't answer the first three questions, but we can provide help with the last one, courtesy of Jim Salters, president of The Business Backer, a small business funding provider based in Cincinnati. Whatever the reason for your needing a loan, he recommends following these steps:
1. Get your paperwork together.
"To expedite your application process, gather important paperwork and historical information about your business and yourself," Salters says. This will include your business's federal tax ID, your company's start date, gross revenues, and business credit score. You'll also need its bank statements, processing statements, and other legal documents.
As owner, you'll also need to provide your social security number and personal credit score. If you own less than 50 percent of your business, you'll need to supply this information for your co-owners as well.
2. Figure out how much you'll need-now and in the future.
Determine how much you'll need to borrow, and whether the loan is likely to be a one-time-only event. This matters, Salters says, because some lenders are more appropriate for a one-time loan than for ongoing financing.
3. Get expert help.
"You wouldn't go to court without a lawyer or do your business taxes without a CPA," Salters says, and he believes the same principle should apply to looking for a business loan, and selecting a funding source. "There is an overwhelming number of providers and options and it is difficult to not only research but understand what is available."
Look for an expert with expertise on and access to all the different funding options, Salters advises. And before making a final selection, consider how that expert will be compensated for helping you, and whether that compensation may bias him or her to direct you toward one option or another.
4. Check prospective funding sources out carefully.
"Unfortunately, some lenders, brokers, and funders charge hidden fees, make false or misleading claims, and do not disclose the true cost of funds," Salters warns. To combat this, do your homework. Check out their website and/or paperwork to see if they disclose the fees associated with loans. Look up the funder's Better Business Bureau rating and membership information.
Check out their websites, looking for testimonials from reputable companies. And then do an online search to see what other customers have to say about them, as well as for any public records. "It should raise red flags if a company has a track record of complaints or numerous public records involving litigation."
5. Consider whether you just want quick capital or a long-term business partner.
Salters believes its best to view your lender as an ongoing resource for your business. "Treat this process as if you were looking for a long-term business partner," he suggests. "Aim to work with a partner who truly understands your goals and is interested in helping you accomplish them over the long run, rather than trying to sell you on funds you don't need or forcing you to pay unnecessary fees. Seek to build a track record and relationship with your lender that can eventually lead to better products, terms, and rates." It's especially important to do this type of homework when it comes to alternative lenders, he adds, since they often charge much higher fees if you need additional financing before your original loan is paid off.
6. Make sure to ask the right questions.
Before signing on the dotted line, make sure you have answers to these questions:
- What fees will I pay?
- Will you file a UCC on this funding? (A UCC-for Uniform Commercial Code-is a lien against your collateral filed with your state government.) Some lenders' contracts authorize them to file a UCC from the moment you apply for a loan and charge a fee to remove it, so it's quite important to know if and when your lender will file a UCC.
- Are there limitations on how I use the money?
- What are the repayment terms?
- What if I need more funding later?
- What happens if I default? (You may not want to ask this question but it's important to find out the answer.)
Armed with clear answers to all of these, you'll be in the best position to make the best choice among financing options.